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Exchange Rate Bands with Price Inertia

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Author Info
Miller, Marcus
Weller, Paul

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Abstract

We formulate a stochastic, rational-expectations model of exchange rate determination, in which there are random shocks to the process of sluggish price adjustment. We examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates and describe the intervention policies needed to defend the bands in each case. We consider the possibility that commitment to defend a particular nominal band may be less than fully credible, and we analyse the implications of operating certain rules for realignment. We contrast our results with those which arise in the Krugman model of a nominal band.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 421.

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Date of creation: May 1990
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Handle: RePEc:cpr:ceprdp:421

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Related research
Keywords: Currency Band Realignments; Price Inertia; Stochastic Process Switching; Target Zones;

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  1. Simon Broome, 2003. "Limited Reserves and the Optimal Width of an Exchange Rate Target zone," Economics, Finance and Accounting Department Working Paper Series n1220803, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
    Other versions:
  2. Jesús Crespo-Cuaresma & Balázs Égert & Ronald MacDonald, 2005. "Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States," William Davidson Institute Working Papers Series wp771, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  3. Luisa Corrado & Marcus H. Miller & Lei Zhang, 2003. "Exchange Monitoring Bands: Theory and Policy," CEIS Research Paper 8, Tor Vergata University, CEIS. [Downloadable!]
  4. Christian Bauer & Paul De Grauwe & Stefan Reitz, 2007. "Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Arai, Mahmood & Kinnwall, Mats & Skogman Thoursie, Peter, 2002. "Cyclical and Causal Patterns of Inflation and GDP Growth," Research Papers in Economics 2002:5, Stockholm University, Department of Economics. [Downloadable!]
    Other versions:
  6. Christopher Green, 1998. "Banks as Interest Rate Managers," Journal of Financial Services Research, Springer, vol. 14(3), pages 189-208, December. [Downloadable!] (restricted)
  7. Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Robert Amano & Richard Black & Marcel Kasumovich, 1997. "A Band-Aid Solution to Inflation Targeting," Working Papers 97-11, Bank of Canada. [Downloadable!]
  9. Dean Corbae & Chris Neely & Paul Weller, 1998. "Endogenous realignments and the sustainability of a target," Working Papers 1994-009, Federal Reserve Bank of St. Louis. [Downloadable!]
  10. Bernd Kempa & Michael Nelles, 1999. "Sticky Prices And Alternative Monetary Feedback Rules: How Robust Is The Overshooting Phenomenon?," International Economic Journal, Korean International Economic Association, vol. 13(3), pages 1-18, October. [Downloadable!] (restricted)
  11. Mustapha Baghli, 2004. "Modelling the FF/MM rate by threshold cointegration analysis," Applied Economics, Taylor and Francis Journals, vol. 36(6), pages 533-548, April. [Downloadable!] (restricted)
  12. Corrado, L. & Marcus Miller & Lei Zhang, 2002. "Exchange Rate Monitoring Bands: Theory and Policy," Cambridge Working Papers in Economics 0209, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  13. Lars E.O. Svensson, 1994. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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